7.8 Government Grants
Government grants are a form of government assistance that may be granted to
entities, either to encourage those entities to fulfill certain objectives (e.g.,
providing a financial grant to an entity to fund cancer research) or to assist them
during times of crisis (e.g., the CARES Act). Generally, a recipient of a government
grant is not expected to repay the grant provided that the recipient complies with
the grant’s conditions.
Not all government assistance is provided to a recipient in the form of a cash payment. For example, a government grant could be in the form of tax credits. In these situations, an entity must determine whether the tax credits are refundable.
Refundable tax credits (e.g., qualifying research and development [R&D]
credits in certain countries and state jurisdictions and alternative fuel tax
credits for U.S. federal income tax) do not depend on an entity’s ongoing tax status
or tax position, allowing an entity to receive a refund despite being in a taxable
loss position. Consequently, the refundable tax credits are similar to government
grants and are generally accounted for similarly. This section discusses such tax
credits as well as other government grants. For more information on the accounting
for refundable tax credits, see Section 2.7 of Deloitte’s Roadmap Income Taxes.
Tax credits whose realization ultimately depends on taxable income (e.g., investment tax credits and R&D) are not refundable. Such tax credits are recognized as a reduction of income tax, should be accounted for in accordance with ASC 740, and are not discussed in this section. Entities are encouraged to consult with their accounting advisers when it is not clear whether tax credits are refundable.
In determining the appropriate cash flow presentation of government grants (that are
not tax credits recognized as a reduction of income tax and accounted for in
accordance with ASC 740), it is important to consider the nature of the grants since
government assistance can take many different forms. We consider government grants
related to long-lived assets to be capital grants and grants related to income to be
income grants, as discussed below. However, some government grants may have aspects
of both capital grants and income grants (i.e., the grant may be intended to
subsidize the purchase of long-lived assets and certain operating costs). Therefore,
entities subject to multiple conditions should carefully assess the grant received
and should consider the guidance in Section
6.4 of this Roadmap.
7.8.1 Capital Grant
The classification of a capital grant in the statement of cash flows depends on
the timing of the cash receipt compared with the timing of the associated costs
to which the grant is related. If an entity receives the cash from the grant
after it has incurred the capital costs, it would be appropriate to present the
cash inflow from the government in the same category (i.e., investing) as the
original payment for the associated long-lived asset.
However, if the grant funding is received before the
expenditures have been incurred, it would be appropriate for the entity to
present that cash inflow as a financing activity, because receiving the cash
before incurring the related cost would be similar to receiving a refundable
loan advance or to an NFP’s receipt of a contribution of a refundable advance
that, according to the donor’s stipulation, is restricted for capital
investment. ASC 230-10-45-14(c) requires that the following be classified as
cash inflows from financing activities:
Receipts from
contributions and investment income that by donor stipulation are restricted
for the purposes of acquiring, constructing, or improving property, plant,
equipment, or other long-lived assets or establishing or increasing a
donor-restricted endowment fund.
In addition, when the entity incurs the costs in accordance with the conditions
of the government grant, it should disclose the existence of a noncash financing
activity resulting from the fulfillment of the grant requirements.
Example 7-16
Entity C is entitled to receive $100 million in tax credits upon completing a new manufacturing facility and obtaining a certificate of occupancy from the local authority. Because C does not need to incur a tax liability to collect the tax credits, the tax credits are refundable and are not within the scope of ASC 740.
On December 31, 20X1, C starts the construction of the facility and presents the capital expenditures as an investing activity in its statement of cash flows. On December 31, 20X2, C completes the manufacturing facility and pays the remaining total construction costs. On January 1, 20X3, C obtains the certificate of occupancy and receives the $100 million in tax credits.
In this example, because the construction costs are classified as an investing activity in C’s statement of cash flows and the payments are made before the receipt of the grant, C would present the grant monies as an investing activity in its statement of cash flows for 20X3.
Example 7-17
Assume the same facts as in the example above except that the grant monies are
received before any capital expenditures are incurred.
Entity C would record the grant monies as an asset with
a corresponding liability on the balance sheet. The
receipt of the grant would be reflected as a financing
cash inflow in the statement of cash flows in accordance
with ASC 230-10-45-14(c).
Connecting the Dots
When a for-profit entity applies the IAS 20 framework,
the classification of cash flows associated with a capital grant is
generally determined on the basis of when the entity receives the grant.
The entity should classify cash received for a capital grant as a
financing cash inflow if the entity receives the cash before incurring
the cost of the long-term construction project to which the grant is
related. In contrast, the entity should classify the cash proceeds from
a capital grant as an investing cash inflow if the entity receives the
grant after incurring the cost of the project.
However, in accordance with ASC 958-605, an NFP must
recognize all government grants as contributions received. Therefore, we
believe that such an entity should apply the guidance in ASC
230-10-45-14(c), which states that the entity should present as a
financing cash inflow any “[r]eceipts from contributions and investment
income that by donor stipulation are restricted for the purposes of
acquiring, constructing, or improving property, plant, equipment, or
other long-lived assets or establishing or increasing a donor-restricted
endowment fund.” Accordingly, an NFP applying this guidance would
classify the cash received from a government grant contribution as a
financing cash inflow, without regard to the timing of when it receives
the grant proceeds.
Although NFPs are required to apply the guidance above,
for-profit entities can also apply the framework in ASC 958-605 — and,
accordingly, the guidance in ASC 230-10-45-14(c) — by analogy in
accounting for capital grants.
7.8.2 Income Grant
Similarly, if an entity receives an income grant as reimbursement for qualifying
operating expenses, the grant would be presented in the statement of cash flows
as an operating activity if it was received after the operating expenses were
incurred. However, some entities may believe that when cash is received before
the qualifying operating expenses are incurred, it would be appropriate to
present the cash inflow as a financing activity for the advance in a manner
consistent with the guidance for capital grants above. Alternatively, others may
believe that it is acceptable to present the cash inflow as an operating
activity if the entity expects to comply with the terms of the grant (e.g., an
advance on future payroll taxes credit) so that both the inflow and outflow are
presented in the operating category. Given the absence of explicit guidance, we
believe that either approach is acceptable. An entity’s election of one of the
above approaches is a matter of accounting policy that the entity should
disclose and apply consistently in similar arrangements.
Example 7-18
Entity P is awarded a government grant
to receive up to $50 million of aggregate funding for
certain R&D activities. The intent of the government
grant is for P to perform R&D activities to achieve
the grant’s stated objectives. Grant funding is provided
after qualifying R&D costs are incurred by P.
Entity P records R&D expenses as period expenses and
classifies the cash outflows for the R&D expenses as
an operating activity in its statement of cash flows.
Therefore, P should classify the cash inflows from
receipt of grant monies as an operating activity in its
statement of cash flows.